Annual report BlackRock Corporate Bond Fund

Transcription

1 Annual report BlackRock Corporate Bond Fund ended 28 February 2017

2 Contents General Information General Information 2 About the Fund 3 Investment Objective & Policy 3 Fund Manager 3 Significant Events 3-4 Risk and Reward Profile 4 Performance Table 5 Classification of Investments 6 Investment Report 7 Performance Record 9-12 Distribution Tables Report on Remuneration Portfolio Statement Statement of Total Return 27 Statement of Change in Net Assets Attributable to Unitholders 27 Balance Sheet 28 Notes to Financial Statements Statement of Manager s Responsibilities 50 Statement of the Depositary s Responsibilities in Respect of the Fund and Report of the Depositary to the Unitholders of the Fund for the Year Ended 28 February Independent Auditor s Report Supplementary Information Manager & Registrar BlackRock Fund Managers Limited 12 Throgmorton Avenue, London EC2N 2DL Telephone: Dealing and Investor Services: Member of The Investment Association and authorised and regulated by the Financial Conduct Authority. Directors of the Manager G D Bamping* R A Damm N C D Hall* R A R Hayes A M Lawrence A J Stenning (resigned 13 December 2016) E E Tracey M T Zemek* * Non-executive Director. Trustee BNY Mellon Trust & Depositary (UK) Limited 160 Queen Victoria Street, London EC4V 4LA Authorised and regulated by the Financial Conduct Authority. Investment Manager BlackRock Investment Management (UK) Limited 12 Throgmorton Avenue, London EC2N 2DL Authorised and regulated by the Financial Conduct Authority. Securities Lending Agent BlackRock Advisors (UK) Limited 12 Throgmorton Avenue, London EC2N 2DL Authorised and regulated by the Financial Conduct Authority. Auditor Ernst & Young LLP 1 More London Place, London SE1 2AF Custodian The Bank of New York Mellon (International) Limited 1 Canada Square, London E14 5AL Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. BlackRock s proxy voting agent is ISS (Institutional Shareholder Services). This Report relates to the packaged products of and is issued by: BlackRock Fund Managers Limited 12 Throgmorton Avenue, London EC2N 2DL Telephone: Dealing and Investor Services: blackrock.co.uk For your protection, telephone calls are usually recorded. 1 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 2

3 About the Fund Significant Events continued BlackRock Corporate Bond Fund (the Fund ) is an authorised unit trust scheme and qualifies as a UCITS scheme under the Financial Conduct Authority s Collective Investment Schemes Sourcebook (the COLL Sourcebook ). The Fund was established on 29 June The Fund was previously known as Mercury High Income Bond Fund, then, with effect from 30 September 2000, Merrill Lynch High Income Bond Fund. On 28 April 2008 the Fund changed its name to BlackRock High Income Bond Fund. The Fund changed its investment objective and policy and adopted its present name with effect from close of business on 17 September Investment Objective & Policy The objective of the Fund is to maximise total return by investing principally in corporate bonds and other interest-bearing securities. Exposure to non-sterling denominated assets will typically be hedged back to Sterling. Separately, the Fund may also invest in preference shares, convertibles, other transferable securities and collective investment schemes. Change to Gross Pricing on Interest Distributions With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e. without the deduction of income tax. Changes in the Directors of the Manager AJ Stenning resigned as a Director effective 13 December Discontinuation of the Short Report The Financial Conduct Authority issued a Policy Statement (PS16/23: Smarter Consumer Communications: Removing ineffective disclosure requirements in our Handbook ) in which it removed the obligation on authorised fund managers to prepare an annual short report and a half-yearly short report for all UCITS schemes and non-ucits retail schemes that they manage. As a result of this, the Manager has made the decision to discontinue the production of short reports and unitholders will no longer receive the short report for the Fund. The long form annual and interim reports will continue to be produced and are available upon request from the Manager. Fund Manager Risk and Reward Profile As at 28 February 2017, the Fund Manager is Ben Edwards. Significant Events Potential Implication of Brexit In a referendum held on 23 June 2016, the electorate of the United Kingdom ( UK ) resolved to leave the European Union ( EU ). The result has led to political and economic instability and volatility in the financial markets of the UK and more broadly across Europe. It may also lead to weakening in consumer, corporate and financial confidence in such markets as the UK negotiates its exit from the EU. The longer-term process to implement the political, economic and legal framework between the UK and the EU is likely to lead to continuing uncertainty. The changes, if any, to the marketing of the Fund in the EU post Brexit have yet to be determined, and may be subject to the outcomes of ongoing negotiations between the EU and the UK regarding the UK s exit from the EU. The result of this referendum will not change the underlying investment philosophies of how the Fund s portfolio is managed, however the mid to long term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund to execute its strategies and to receive attractive returns, and may also result in increased costs to the Fund. Securities Financing Transactions Regulation (Regulation (EU) 2015/2365) ( SFTR ) SFTR came into force on 12 January 2016 and, amongst other requirements, introduces new disclosure requirements in the Fund s annual and half-yearly reports published after 13 January 2017 detailing the Fund s use of securities financing transactions and total return swaps ( TRS ). As a result, additional disclosures on securities lending and collateral have been included in the Supplementary Information section to the Annual Report. The information contained within the Supplementary Information should be read in conjunction with the financial instruments and risks section of the financial statements. Lower risk Typically lower rewards Higher risk Typically higher rewards Unit Class A Income A Accumulation D Income D Accumulation S Income S Accumulation X Accumulation The risk indicator was calculated incorporating historical or simulated historical data and may not be a reliable indication of the future risk profile of the Fund. The risk category shown is not guaranteed and may change over time. The lowest category does not mean risk free. The use of derivatives will impact the value of the Fund and may expose the Fund to a higher degree of risk. Derivatives are highly sensitive to changes in the value of the asset on which they are based and can increase the size of losses and gains, resulting in greater fluctuations in the value of the Fund. The impact to the Fund can be greater where derivatives are used in an extensive or complex way. For more information on this, please see the Fund s Key Investor Information Documents (KIIDs), which are available at 3 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 4

4 Performance Table Classification of Investments For the three years For the five years TOTAL RETURN (with net income reinvested) Class D Accumulation * BlackRock Corporate Bond Fund +11.6% +21.4% +41.3% Bank of America Merrill Lynch Sterling Corporate Bond Index +13.4% +25.4% +45.5% All Fund figures quoted are based on bid-to-bid dealing prices (the price at which units are sold) and are calculated net of fees. Performance returns are cumulative. All returns are in Sterling. * Effective 30 April 2016, the primary unit class was changed from class A Accumulation to class D Accumulation to reflect the Investment Association s new definition for the primary unit class. Figures from Index Vendor. The following charts provide an analysis of the portfolio weightings as at 28 February 2017 and 29 February 2016 by their respective asset types. 28 February 2017 Euro Denominated Fixed Rate Corporate Bonds 5.84% Euro Denominated Fixed Rate Government Bonds 1.87% Euro Denominated Variable Rate Corporate Bonds 0.70% UK Sterling Denominated Fixed Rate Corporate Bonds 62.90% UK Sterling Denominated Fixed Rate Government Bonds 14.79% UK Sterling Denominated Variable Rate Corporate Bonds 10.90% US Dollar Denominated Fixed Rate Corporate Bonds 2.09% Other 0.91% All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and the return of your initial investment amount cannot be guaranteed. Changes in exchange rates may cause the value of an investment to fluctuate. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. 29 February 2016 Euro Denominated Fixed Rate Corporate Bonds 2.58% Euro Denominated Variable Rate Corporate Bonds 2.94% UK Sterling Denominated Fixed Rate Corporate Bonds 52.67% UK Sterling Denominated Fixed Rate Government Bonds 19.18% UK Sterling Denominated Variable Rate Corporate Bonds 15.18% US Dollar Denominated Fixed Rate Corporate Bonds 3.70% Other 3.75% 5 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 6

5 Investment Report Summary of Performance over the Year The Fund returned 11.6%* over the year to 28 February 2017, regrettably underperforming its benchmark, the Bank of America Merrill Lynch Sterling Corporate Bond Index, which returned 13.4%. Over the six-month period to 28 February 2017, the Fund returned 0.0%*, outperforming the benchmark, which returned -2.5%. The Fund underperformed over the 12-month period due to a sharp decline in government bond yields, and a correspondingly dramatic rise in their prices, benefiting funds with higher duration or sensitivity to interest rates. The Fund typically has less duration (sensitivity to changes in interest rates) than the benchmark. This is intended to reduce absolute volatility in returns and downside over the longer term. However, this lower exposure also meant that the Fund benefited to a lesser extent than the benchmark from the large fall in UK government bond yields. Outlook We remain positive on UK corporate bonds, which we believe are underpinned by a favourable fundamental and technical outlook. We continue to favour BBB rated companies, which have less scope to increase debt than high-quality AAA/AA rated issues. We maintain our positive view on UK and Swiss banks, high-quality corporate hybrids and debt backed by real assets. We also like selective euro-denominated bonds. March 2017 Fund Manager s Commentary Over the past year, a range of unexpected events affected the stability of markets. Political risk was particularly pronounced with three key events the UK s decision to leave the European Union on 23 June 2016 ( Brexit ), the election of Donald Trump as US president in November 2016 and the Italian referendum dominating investor focus. Interest rates rose and fell sharply, but gilt yields (the interest rate paid on UK government bonds) ended the year down only slightly (prices slightly higher). On the other hand, corporate bonds generated double-digit returns, underpinned by the Bank of England s ( BoE ) corporate bond buying programme and strong investor demand amid low supply. As the first quarter of the reporting year began, investors appetite for risk assets was weak, but central banks low interest rates, rising commodity prices and Chinese stimulus helped to improve market sentiment. Many risk assets, such as US high yield and investment-grade credit, went on to perform well, before the rally was interrupted in the second quarter of the year, with risk-free gilt yields hitting record lows as investors sought safer investments after the Brexit referendum. However, risk assets were quick to rebound (with the exception of the pound sterling), helped by the BoE s interest-rate cut and programme to stimulate economic growth. In the second half of the twelve month period, however, gilt and global bond yields increased (prices fell) and inflation expectations rose, with the outcome of the US general election and the Federal Reserve s interest-rate increase amplifying the trends. The Fund s relative underperformance was, as noted above, driven by its lower interest-rate exposure amid a fall in gilt yields. This was partially offset by positive returns from our sector and security selection. Higher-risk assets were the main contributors to relative return in particular, subordinated financials (where investors are only paid back once all senior debtholders have been paid in full) and high-quality corporate bonds with both debt and equity characteristics (hybrids). Debt-backed real assets also outperformed, particularly those in UK pubs and Tesco. We maintain an interest-rate position within the range of years versus the benchmark of 8.5 years (as at 28 February 2017). We see the potential for gilt yields to move higher, due to the prospect of USled reflation and stronger economic data. However, we remain constructive on yields over the longer term, driven by our view that the structural factors that drove yields lower ageing demographics, weak productivity and high debt levels persist and will limit how far yields can ultimately rise. * Performance figures quoted are based on bid-to-bid dealing prices (the price at which units are sold). Performance is calculated net of fees and reported for the Fund s class D Accumulation. 7 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 8

6 Performance Record Comparative Table Comparative Table A Income A Accumulation D Income D Accumulation to to to to Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges (1.17) (1.15) (1.13) (3.28) (3.08) (2.96) Return after operating charges (0.34) (1.16) Distributions (3.58) (4.16) (4.10) (9.90) # (11.20)* (10.70)* Retained distributions on accumulation units N/A N/A N/A 8.41 # 8.96* 8.56* Closing net asset value per unit After direct transaction costs of (0.01) Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges (0.64) (0.63) (0.62) (1.78) (1.69) (1.61) Return after operating charges Distributions (3.68) (4.26) (4.18) (10.15) # (11.41)* (10.96)* Retained distributions on accumulation units N/A N/A N/A 8.62 # 9.13* 8.77* Closing net asset value per unit After direct transaction costs of (0.01) Performance Return after charges % (0.31)% 9.56% 11.58% (0.40)% 9.75% Performance Return after charges % 0.14% 10.17% 12.14% 0.10% 10.32% Other information Closing net asset value () 15,613 21,596 42,787 56,815 72,081 93,461 Closing number of units 13,937,154 20,831,341 39,536,014 18,000,370 25,359,870 32,492,541 Operating charges % 1.08% 1.08% 1.08% 1.08% 1.08% Direct transaction costs % 0.00% 0.00% 0.00% 0.00% 0.00% Other information Closing net asset value () 93,936 78,237 46,814 94,023 74,639 88,112 Closing number of units 81,381,006 73,611,289 42,404,291 28,979,146 25,677,169 30,108,067 Operating charges % 0.58% 0.58% 0.57% 0.58% 0.58% Direct transaction costs % 0.00% 0.00% 0.00% 0.00% 0.00% Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Highest offer unit price Lowest bid unit price The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/depositary and entry/exit charges paid to an underlying collective investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund s purchase and sale of debt instruments. See note 15 for further details. # With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e., without the deduction of income tax. * Difference relates to 20% income tax withheld on distributions in accordance with HMRC. Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Highest offer unit price Lowest bid unit price The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/depositary and entry/exit charges paid to an underlying collective investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund s purchase and sale of debt instruments. See note 15 for further details. # With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e., without the deduction of income tax. * Difference relates to 20% income tax withheld on distributions in accordance with HMRC. 9 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 10

7 Performance Record continued Comparative Table Comparative Table S Income S Accumulation X Accumulation For the period from ^ to For the period from ^ to For the period from ^ to Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges (0.56) (0.53) (0.48) (0.60) (0.55) (0.49) Return after operating charges Distributions (3.53) (4.09) (3.75) (3.78) # (4.26)* (3.70)* Retained distributions on accumulation units N/A N/A N/A 3.21 # 3.41* 2.96* Closing net asset value per unit After direct transaction costs of Performance Return after charges % 0.18% 9.55% 12.23% 0.14% 9.64% Other information Closing net asset value () 14,154 7,788 4, ,418 48,853 30,765 Closing number of units 12,780,582 7,641,538 4,263,694 93,845,055 45,145,610 28,263,099 Operating charges % 0.51% 0.47% 0.52% 0.51% 0.47% Direct transaction costs % 0.00% 0.00% 0.00% 0.00% 0.00% Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Highest offer unit price Lowest bid unit price ^ The date of commencement of operations. 1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/depositary and entry/exit charges paid to an underlying collective investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund s purchase and sale of debt instruments. See note 15 for further details. # With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e., without the deduction of income tax. * Difference relates to 20% income tax withheld on distributions in accordance with HMRC. Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges (0.02) (0.03) (0.02) Return after operating charges Distributions (3.67) # (4.10)* (1.43)* Retained distributions on accumulation units 3.11 # 3.28* 1.14* Closing net asset value per unit After direct transaction costs of Performance Return after charges % 0.59% 5.19% Other information Closing net asset value () 104,648 81,811 81,906 Closing number of units 89,040,723 78,126,438 78,110,774 Operating charges % 0.03% 0.02% Direct transaction costs % 0.00% 0.00% Prices Pence per unit Pence per unit Pence per unit Highest offer unit price Lowest bid unit price ^ The date of commencement of operations. 1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/depositary and entry/exit charges paid to an underlying collective investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund s purchase and sale of debt instruments. See note 15 for further details. # With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e., without the deduction of income tax. * Difference relates to 20% income tax withheld on distributions in accordance with HMRC. 11 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 12

8 Distribution Tables for the year ended 28 February 2017 Final Distribution in Pence per Unit Group 1 purchased prior to 1 December 2016 Group 2 purchased 1 December 2016 to 28 February 2017 First Interim Distribution in Pence per Unit Group 1 purchased prior to 1 March 2016 Group 2 purchased 1 March 2016 to 31 May 2016 A Income A Accumulation D Income D Accumulation S Income S Accumulation X Accumulation A Income A Accumulation D Income D Accumulation S Income S Accumulation X Accumulation Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Gross Revenue* Equalisation Distribution payable Distribution paid * With effect from 1 December 2016, the Fund moved to a gross pricing basis. All interest distributions paid after 6 April 2017 will be made gross, i.e., without the deduction of income tax. Third Interim Distribution in Pence per Unit Group 1 purchased prior to 1 September 2016 Group 2 purchased 1 September 2016 to 30 November 2016 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Gross Revenue Income tax Net revenue (interest) Equalisation Distribution paid Distribution paid Equalisation applies only to units purchased during the distribution period (Group 2 units). It is the average amount of revenue included in the purchase price of all Group 2 units and is refunded to holders of these units as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of units for capital gains tax purposes. A Income A Accumulation D Income D Accumulation S Income S Accumulation X Accumulation Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Gross Revenue Income tax Net revenue (interest) Equalisation Distribution paid Distribution paid Second Interim Distribution in Pence per Unit Group 1 purchased prior to 1 June 2016 Group 2 purchased 1 June 2016 to 31 August 2016 A Income A Accumulation D Income D Accumulation S Income S Accumulation X Accumulation Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Gross Revenue Income tax Net revenue (interest) Equalisation Distribution paid Distribution paid BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 14

9 Report on Remuneration The below disclosures are made in respect of the remuneration policies of the BlackRock group ( BlackRock ), as they apply to BlackRock Fund Managers Limited (the Manager ). The disclosures are made in accordance with the Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities ( UCITS ), as amended, including in particular by Directive 2014/91/EU of the European Parliament and of the council of 23 July 2014, (the Directive ), the Guidelines on sound remuneration policies under the UCITS Directive and AIFMD issued by the European Securities and Markets Authority, the Financial Conduct Authority Handbook SYSC 19E: The UCITS Remuneration Code (the UCITS Remuneration Code ), and COLL R(7). BlackRock s UCITS Remuneration Policy (the UCITS Remuneration Policy ) applies to the EEA entities within the BlackRock group authorised as a manager of alternative investment funds in accordance with the Directive, and will ensure compliance with the requirements of Article 14b of the Directive and the UCITS Remuneration Code. The Manager has adopted the UCITS Remuneration Policy, a summary of which is set out below. Role of the Compensation Committees Remuneration governance is a tiered structure including the Management Development and Compensation Committee ( MDCC ) of BlackRock, Inc. s board of directors (the BlackRock, Inc. Board ) (BlackRock Inc. s independent remuneration committee), complemented by the EMEA Compensation Committee (the Committee ) and the Manager s board of directors (the Manager s Board ). These bodies are responsible for the determination of the Manager s remuneration policies. (a) MDCC The MDCC s primary purposes include: to provide oversight of: BlackRock s executive compensation programmes; BlackRock s employee benefit plans; such other compensation plans as may be established by BlackRock from time to time for which the MDCC is deemed as administrator; and review and discuss the compensation discussion and analysis included in the BlackRock, Inc. annual proxy statement with management and approval of the MDCC report for inclusion in the proxy statement. The MDCC directly retains its own independent compensation consultant, Semler Brossy Consulting Group LLC, who has no relationship with BlackRock, Inc. or the BlackRock, Inc. Board that would interfere with its ability to provide independent advice to the MDCC on compensation matters. The MDCC is currently composed of Messrs. Gerber (Chairman), Komansky, Grosfeld, Maughan, Mills and Nixon. The BlackRock, Inc. Board has determined that all of the members of the MDCC are independent within the meaning of the listing standards of the New York Stock Exchange (NYSE), which requires each meet a non-employee director standard. The MDCC held 8 meetings during The MDCC charter is available on BlackRock, Inc. s website ( (b) EMEA Compensation Committee The Committee is established for the purpose of reviewing compensation policies, practices, and principles as required by local/regional rules set by regulatory bodies. Specifically, the Committee s primary purposes are to review and make recommendations concerning: executive compensation programmes; employee benefit plans; such other compensation plans as may be established from time to time; and other local/regional compensation policies, practices, and principles as required to comply with local/ regional rules as set by regulators. The Committee consists of a minimum of three members and is constituted in a way that enables it to exercise its judgment and demonstrate its ability to make decisions which are consistent with the current and future financial status of the business. The current members are: David Blumer, Head of the EMEA Region; Dan Dunay, Global Head of Reward; and Karen Dennehy, EMEA Head of Human Resources. Only members of the Committee have the right to attend Committee meetings and the Committee may request the attendance of any executive or other person as deemed appropriate to facilitate the review of remuneration recommendations and policy design to ensure that the remuneration practices are consistent with effective risk management and do not encourage excessive risk taking. Examples of additional attendees may include individuals from the Enterprise Risk and Regulatory Compliance functions. Decision-making process Compensation decisions for employees are made once annually in January following the end of the BlackRock performance year. This timing allows full-year financial results to be considered along with other non-financial goals and objectives. Although the framework for compensation decision-making is tied to financial performance, significant discretion is used to determine individual compensation based on achievement of strategic and operating results and other considerations such as management and leadership capabilities. No set formulas are established and no fixed benchmarks are used in determining annual incentive awards. In determining specific individual compensation amounts, a number of factors are considered including non-financial goals and objectives and overall financial and investment performance. These results are viewed in the aggregate without any specific weighting, and there is no direct correlation between any particular performance measure and the resulting annual incentive award. Annual incentive awards are generated from a bonus pool. The size of the projected bonus pool, including cash and equity awards, is reviewed throughout the year by the MDCC and the final total bonus pool is approved after year-end. As part of this review, the MDCC receives actual and projected financial information over the course of the year as well as final year-end information. The financial information that the MDCC receives and considers includes the current year projected income statement and other financial measures compared with prior year results and the current year budget. The MDCC additionally reviews other metrics of Blackrock s financial performance (e.g., net inflows of AUM and investment performance) as well as information regarding market conditions and competitive compensation levels. 15 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 16

10 Report on Remuneration continued The MDCC regularly considers management s recommendation as to the percentage of pre-incentive operating income that will be accrued and reflected as a compensation expense throughout the year for the cash portion of the total annual bonus pool (the accrual rate ). The accrual rate of the cash portion of the total annual bonus pool may be modified by the MDCC during the year based on its review of the financial information described above. The MDCC does not apply any particular weighting or formula to the information it considers when determining the size of the total bonus pool or the accruals made for the cash portion of the total bonus pool. Following the end of the BlackRock performance year, the MDCC approves the final bonus pool amount. As part of the year-end review process the Enterprise Risk and Regulatory Compliance departments report to the Committee on any activities, incidents or events that warrant consideration in making compensation decisions. Individuals are not involved in setting their own remuneration. Control functions Each of the control functions (Enterprise Risk, Legal & Compliance, and Internal Audit) has its own organisational structure which is independent of the business units. The head of each control function is either a member of the Global Executive Committee, BlackRock s global management committee, or has a reporting obligation to the Manager s Board. Functional bonus pools are determined with reference to the performance of each individual function. The remuneration of the senior members of control functions is directly overseen by the Committee. Link between pay and performance There is a clear and well defined pay-for-performance philosophy and compensation programmes which are designed to meet five key objectives as detailed below: attracting, retaining and motivating employees capable of making significant contributions to the longterm success of the business; aligning the interests of senior employees with those of shareholders by awarding BlackRock, Inc. stock as a significant part of both annual and long-term incentive awards; controlling fixed costs by ensuring that compensation expense varies with profitability; linking a significant portion of an employee s total compensation to the financial and operational performance of the business as well as its common stock performance; and discouraging excessive risk-taking. Driving a high-performance culture is dependent on the ability to measure performance against objectives, values and behaviours in a clear and consistent way. Managers use a 5-point rating scale to provide an overall assessment of an employee s performance, and employees also provide a self-evaluation. The overall, final rating is reconciled during each employee s performance appraisal. Employees are assessed on the manner in which performance is attained as well as the absolute performance itself. In keeping with the pay-for-performance philosophy, ratings are used to differentiate and reward individual performance but don t pre-determine compensation outcomes. Compensation decisions remain discretionary and are made as part of the year-end compensation process. When setting remuneration levels other factors are considered, as well as individual performance, which may include: the performance of the Manager, the funds managed by the Manager and/or the relevant functional department; factors relevant to an employee individually (e.g. relevant working arrangements (including part-time status if applicable); relationships with clients and colleagues; teamwork; skills; any conduct issues; and, subject to any applicable policy, the impact that any relevant leave of absence may have on contribution to the business); the management of risk within the risk profiles appropriate for BlackRock s clients; strategic business needs, including intentions regarding retention; market intelligence; and criticality to business. A primary product tool is risk management and, while employees are compensated for strong performance in their management of client assets, they are required to manage risk within the risk profiles appropriate for their clients. Therefore, employees are not rewarded for engaging in high-risk transactions outside of established parameters. Compensation practices do not provide undue incentives for short-term planning or short-term financial rewards, do not reward unreasonable risk and provide a reasonable balance between the many and substantial risks inherent within the business of investment management, risk management and advisory services. The compensation model includes a basic salary, which is contractual, and a discretionary bonus scheme. Although all employees are eligible to be considered for a bonus, there is no contractual obligation to make any award to an employee under its discretionary bonus scheme. In exercising discretion to award a discretionary bonus, the factors listed above (under the heading Link between pay and performance ) may be taken into account in addition to any other matters which become relevant to the exercise of discretion in the course of the BlackRock performance year. Discretionary bonus awards for all employees, including executive officers, are subject to a guideline that determines the portion paid in cash and the portion paid in stock and subject to additional vesting/clawback conditions. As annual compensation increases, a greater portion is paid in stock. The MDCC adopted this approach in 2006 to substantially increase the retention value and shareholder alignment of the compensation package for eligible employees, including the executive officers. The portion deferred into stock vests in equal instalments over the three years following grant. Supplementary to the annual discretionary bonus as described above, equity awards from the Partner Plan and Enterprise Leadership Acceleration at BlackRock Plan are made to select senior leaders to provide greater linkage with future business results. These long-term incentive awards have been established individually to provide meaningful incentives for continued performance over a multi-year period recognizing the scope of the individual s role, business expertise and leadership skills. These awards usually vest fully three years after they are granted. 17 BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 18

11 Report on Remuneration continued Selected senior leaders are eligible to receive performance-adjusted equity-based awards from the BlackRock Performance Incentive Plan ( BPIP ). Awards made from the BPIP have a three-year performance period based on a measurement of As Adjusted Operating Margin 1 and Organic Revenue Growth 2. Determination of pay-out will be made based on BlackRock s achievement relative to target financial results at the conclusion of the performance period. The maximum number of shares that can be earned is 165% of the award in those situations where both metrics achieve pre-determined financial targets. No shares will be earned where BlackRock s financial performance in both of the above metrics is below a pre-determined performance threshold. These metrics have been selected as key measures of shareholder value which endure across market cycles. A limited number of investment professionals have a portion of their annual discretionary bonus (as described above) awarded as deferred cash that notionally tracks investment in selected products managed by the relevant employee. The intention of these awards is to align investment professionals with the investment returns of the products they manage through the deferral of compensation into those products. Clients and external evaluators have increasingly viewed more favourably those products where key investors have skin in the game through significant personal investments. These awards vest in equal instalments over the three years following grant. Identified Staff The UCITS Remuneration Policy sets out the process that will be applied to identify staff as Identified Staff, being categories of staff of the Manager, including senior management, risk takers, control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the risk profiles of the Manager or of the funds it manages. The list of Identified Staff will be subject to regular review, being formally reviewed in the event of, but not limited to: Organisational changes New business initiatives Changes in significant influence function lists Changes in role responsibilities Revised regulatory direction Quantitative Remuneration Disclosure Appropriate disclosures will be made in due course in accordance with Article 69(3) of the Directive once a full BlackRock performance year has been completed. 1 As Adjusted Operating Margin: As reported in BlackRock, Inc. s external filings, reflects adjusted Operating Income divided by Total Revenue net of distribution and servicing expenses and amortisation of deferred sales commission. 2 Organic Revenue Growth: Equal to net new base fees plus net new Aladdin revenue generated in the year (in dollars). Portfolio Statement at 28 February 2017 Holding or Market % of Nominal Value Total Net Value Investment Assets BONDS 99.09%; % UK STERLING 88.59%; % UK Sterling Denominated Fixed Rate Corporate Bonds 62.90%; % 1,575,000 AA Bond 3.781% Senior European Medium Term Notes 31/7/2043 1, ,170,000 AA Bond % Senior European Medium Term Notes 31/7/2043 5, ,730,000 Annington Repackaging % Guaranteed Bonds 10/1/2023 4, ,950,000 AT&T 5.5% Guaranteed Senior Bonds 15/3/2027 6, ,800,000 Bank of America 5.5% Guaranteed Subordinated European Medium Term Bonds 22/11/2021 3, ,800,000 Bank of Scotland 6.375% Guaranteed Subordinated European Medium Term Bonds 16/8/2019 6, ,875,000 Bank of Scotland 7.281% Perpetual Bonds 3, ,030,000 Bank of Scotland 9.375% Guaranteed Subordinated Bonds 15/5/ , ,300,000 Barclays 10% Guaranteed Subordinated European Medium Term Bonds 21/5/2021 2, ,515,000 Barclays 3.125% European Medium Term Notes 17/1/2024 2, ,085,000 Barclays 3.25% European Medium Term Notes 12/2/2027 3, ,985,000 BAT International Finance 2.25% European Medium Term Notes 9/9/2052 1, ,300,000 BAT International Finance 6% Guaranteed European Medium Term Bonds 29/6/2022 4, ,993,000 BHP Billiton Finance 6.5% Bonds 22/10/2077 Ø 6, ,272,760 BL Superstores Finance 5.27% Guaranteed Asset Backed Bonds 4/10/2030 3, ,350,000 BP Capital Markets 1.177% European Medium Term Notes 12/8/2023 4, ,820,000 British American Tobacco 1.75% Bonds 5/7/2021 1, ,700,000 British Telecommunications 5.75% Guaranteed Senior Bonds 7/12/2028 4, ,146,000 Brown-Forman 2.6% Bonds 7/7/2028 4, ,960,000 Bupa Finance 5% Subordinated Notes 25/4/2023 4, ,082 Canary Wharf Finance II 6.455% Guaranteed Asset Backed Bonds 22/10/ ,746,000 Citigroup 5.125% Guaranteed Subordinated European Medium Term Bonds 12/12/2018 1, ,520,909 City Greenwich Lewisham Rail Link 9.375% Bonds 11/10/2020 1, ,840,000 Comcast 5.5% Guaranteed Bonds 23/11/2029 2, ,300,000 Co-Operative Bank 4.75% Guaranteed Bonds 11/11/2021 3, ,410,000 Credit Suisse Finance 7% Guaranteed Bonds 5/10/2020 7, BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 20

12 Portfolio Statement continued Holding or Market % of Nominal Value Total Net Value Investment Assets 2,415,000 Credit Suisse Funding Guernsey 2.75% Bonds 8/8/2025 Ø 2, ,500,000 Credit Suisse Funding Guernsey 3% Bonds 27/5/2022 4, ,955,000 Daimler 1.5% European Medium Term Notes 13/1/2022 3, ,844,300 Dignity % Asset Backed Bonds 31/12/2034 2, ,700,000 E.ON International Finance 6% Guaranteed European Medium Term Bonds 30/10/2019 1, ,800,000 Électricité de France 6% Senior European Medium Term Notes 23/1/2114 2, ,905,000 Enel Finance International 5.625% Guaranteed European Medium Term Bonds 14/8/2024 7, ,360,000 Enterprise Inns 6% Senior Bonds 6/10/2023 2, ,000,000 Enterprise Inns 6.875% Bonds 15/2/2021 5, ,491,617 Equity Release 5.7% Guaranteed Asset Backed Bonds 26/2/2031 1, ,145,000 Eversholt Funding 5.831% Guaranteed Senior European Medium Term Bonds 2/12/2020 1, ,510,000 Experian Finance 3.5% Guaranteed European Medium Term Notes 15/10/2021 2, ,580,000 FCE Bank 2.727% European Medium Term Notes 3/6/2022 Ø 3, ,675,000 Gatwick Funding 6.125% Guaranteed Senior European Medium Term Bonds 2/3/2028 3, ,280,000 GKN 6.75% Bonds 28/10/2019 4, ,410,000 Goldman Sachs 5.5% Guaranteed Subordinated Bonds 12/10/2021 2, ,826,272 Great Rolling Stock 6.875% Guaranteed Senior European Medium Term Bonds 27/7/2035 2, ,065,000 Heathrow Funding 2.75% European Medium Term Note 9/8/2051 1, ,000,000 Heathrow Funding 5.225% Guaranteed Senior European Medium Term Bonds 15/2/2023 5, ,411,000 Heathrow Funding 7.125% Guaranteed European Medium Term Bonds 14/2/2024 4, ,200,000 Iberdrola Finanzas 7.375% Guaranteed European Medium Term Bonds 29/1/2024 1, ,209,000 Imperial Tobacco Finance 8.125% Guaranteed European Medium Term Bonds 15/3/2024 4, ,370,000 InterContinental Hotels 3.75% European Medium Term Notes 14/8/2025 2, ,500,000 Intu Metrocentre Finance 4.125% Senior Notes 6/12/2023 2, ,535,000 John Lewis 8.375% Bonds 8/4/2019 1, ,600,000 KfW 6% Guaranteed European Medium Term Bonds 7/12/ , ,000,000 Manchester Airport Funding 4.125% Senior European Medium Term Notes 2/4/2024 1, Holding or Market % of Nominal Value Total Net Value Investment Assets 1,892,019 Meadowhall Finance 4.986% Guaranteed Mortgage Backed Bonds 12/7/2037 2, ,003,040 Mitchells & Butlers Finance 5.965% Guaranteed Asset Backed Bonds 15/12/2025 2, ,550,000 National Grid Gas Finance 2.75% European Medium Term Notes 22/9/2046 2, ,650,000 National Westminster Bank 6.5% Guaranteed Subordinated Bonds 7/9/ , ,428,000 Northern Gas Networks 5.875% Guaranteed Notes 8/7/2019 1, ,840,000 Northern Powergrid 7.25% Guaranteed Senior Bonds 15/12/2022 2, ,200,000 Porterbrook Rail Finance 5.5% Guaranteed Senior European Medium Term Notes 20/4/2019 Ø 1, ,295,000 Porterbrook Rail Finance 7.125% Guaranteed Senior European Medium Term Bonds 20/10/2026 1, ,849,000 Scottish Widows 5.5% Bonds 16/6/2023 7, ,400,000 Severn Trent Utilities Finance 3.625% European Medium Term Bonds 16/1/2026 1, ,400,000 Southern Gas Network 4.875% Guaranteed European Medium Term Bonds 21/12/2020 1, ,340,000 Southern Gas Networks 2.5% Senior European Medium Term Bonds 3/2/2025 1, ,000,000 Southern Water Services Finance 6.125% Guaranteed Senior European Medium Term Bonds 31/3/2019 1, ,050,000 Telefónica Emisiones 5.289% Guaranteed European Medium Term Bonds 9/12/2022 3, ,750,723 Telereal Secured Finance 4.01% Asset Backed Notes 10/12/2033 1, ,000 Telereal Securitisation % Guaranteed Asset Backed Bonds 10/12/2033 1, ,141,160 Telereal Securitisation % Asset Backed Bonds 10/12/2033 6, ,358 Telereal Securitisation % Guaranteed Asset Backed Bonds 10/12/ ,655,142 Tesco Property Finance % Guaranteed Mortgage Backed Bonds 13/7/2039 4, ,150,000 Thames Water Utilities 2.625% Bonds 24/1/2032 2, ,000,000 Travis Perkins 4.5% Bonds 7/9/2023 Ø 4, ,186,800 Unique Pub Finance 6.542% Bonds 30/3/2021 2, ,395,000 Verizon Communications 4.75% Senior European Medium Term Notes 17/2/2034 2, ,240,000 Virgin Media Secured Finance 5% Bonds 15/4/2027 2, ,395,000 Vodafone 3% European Medium Term Notes 12/8/2056 5, ,500,000 Volkswagen Financial Services 2.375% Guaranteed European Medium Term Notes 13/11/2018 Ø 6, BlackRock Corporate Bond Fund BlackRock Corporate Bond Fund 22